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Chevron, ConocoPhilips Oil Stocks' Profits Rise With Call Options

Written by: Jonathan Yates07/03/14 - 6:00 AM EDT

Tickers in this article:
COP CVX HD KO PTR SNP

NEW YORK ( TheStreet) -- Chevron and other major oil companies such as ConocoPhillips, China Petroleum and PetroChina are alluring candidates for writing covered call options. Let's consider the benefits of this strategy.

I've detailed how "Dividend Aristocrat" stocks -- those with a history of increasing the dividend amount -- such as Coca-Cola and Home Depot have features like rising dividends and bearish earnings outlooks that should allow for profitably writing covered call options . The same factors exist for major oil firms such as Chevron, ConocoPhillips, China Petroleum and PetroChina.

Shareholders benefit in three primary ways from writing covered call options on the stocks that they own. The first is from the selling of the call option, which gives the buyer the right but not the obligation to purchase the shares at a higher price within a time frame. During the period when the option is in effect, the shareholder collects the dividends. If the option is exercised, the owner of the stock gains from selling the shares at the higher price.

There is a market for call options for Chevron, ConocoPhillips, China Petroleum and PetroChina due to how much each stock has risen. Look at the chart below for details. Gas prices are at a 6-year high , which is bullish for oil stocks. Price action like that naturally interests both investors and speculators in call options. It also results in the call options selling at a premium, based on fundamental supply and demand.

Company

Increase for 2014

Dividend Yield

Earnings Decline

Beta

Chevron

~6%

3.28%

-16.70%*

1.06

ConocoPhillips

~24%

3.21%

-1.15%**

0.99

China Petroleum

~19%

4.55%

-1.90%*

0.66

PetroChina

~18%

3.55%

1.40%***

0.86

Source: Finviz. * This year for Chevron and China Petroleum. ** Projected next year for ConocoPhillips. *** 5-year average growth estimated for PetroChina.

The chart also shows the dividend income that will be collected by the seller of the call option. Major oil firms are known for providing shareholders with generous streams of income. That is certainly the case with Chevron, ConocoPhillips, China Petroleum, and PetroChina.

The chart also highlights how much the stocks have increased in price despite the poor earnings outlook. For example, ConocoPhillips is up more than 24% for 2014, with earnings-per-share expected to decline next year. The share price gains for all of the major oil stocks on the chart below far outdistance the earnings outlook for each. Under that forecast, rising share prices would not seem likely in the future.

The stock prices move fairly mildly, too. The beta for the stock market as a whole is 1. Those writing covered call options do not have to worry about wild swings resulting in the shares reaching the strike price. The lower the beta, the less the chance of the call option being exercised. Most stock options go unexercised anyway, according to Joseph Louro of InvestView . From that, the stock owner gets to keep the shares and pocket the proceeds from selling the call option.